Crypto and ESG: Bitcoin’s Energy Consumption and the Future of Blockchain Sustainability

Crypto and Blockchain Sustainability Powers the future of ESG investing

Crypto and Blockchain Sustainability Powers the future of ESG investing

With critics questioning the viability of the crypto ecosystem after sustainability concerns raised by Elon Musk and others, Sarson Funds believes that crypto moves in stride with the future of sustainable finance and ESG investing. Contrary to popular opinion that Bitcoin and crypto assets are encouraging ill-spend of the global energy supply, this article will overview Bitcoin’s true energy usage next to traditional financial institutions, highlight the primary energy source of Bitcoin mining operations, and identify how the ecosystem is launching more scalable, energy efficient blockchains to spearhead the future of financial operations.

To begin, let’s consider the computations of Sarson Funds Chief Marketing Officer Jahon Jamali, who recently calculated the true energy usage of the entire traditional banking system next to Bitcoin’s singular decentralized network. Jamali derived this number by adding together 3 metrics: server, branch, and ATM costs, which he estimated to be an average of 140 terrawat-hours (TWh) per year to power its operations, while Bitcoin uses only 32.56 TWh per year. While 32.56 TWh beats the energy usage of the entire country of Norway, comparing these vastly different entities is like comparing apples and oranges. To measure Bitcoin’s energy usage in relation to a more comparable entity, it is only fair to size Bitcoin up against the system it is competing against: the global financial infrastructure. Traditional finance uses roughly 400% the energy that Bitcoin does, so while the Bitcoin network does use a substantial amount of energy, it pales in comparison to the system it aims to upend.

The next argument to tackle: Bitcoin and dirty energy. This past week, Bitcoin lost nearly 12% of its value when Elon Musk raised concerns that much of Bitcoin’s mining and transaction operations were sourced from fossil fuels. Musk commented on his concern for cryptocurrency’s adoption coming with environmental costs in a tweet this past Wednesday, stating “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.” While Musk’s concerns are valid regarding the use of dirty energy in some crypto mining, 76% of Bitcoin miners are using renewable energy to fuel their operations, according to Ark Investments in a recent CNBC “Closing Bell” interview. So, while Bitcoin may be using comparable amounts of energy as Norway, its carbon footprint is somewhere between half and a quarter, according to a Coinshares article on the environmental impact of Bitcoin mining.

Lastly, several blockchains have emerged in the past year that aim to construct a new horizon of sustainability for the crypto ecosystem. These blockchains have integrated Proof-of-Stake (PoS) block creation protocols, the sustainability-minded progression from Proof-of-Work (PoW) block validation, also known as mining, that powers the aggressive energy consumption of industry leaders like Bitcoin, Ethereum, and Litecoin. PoS protocols allow token holders with certain native token reserves to stake tokens, meaning that their own token holding allows them to validate blocks on the network and collect token rewards over time. Instead of miners using large quantities of energy to solve mathematical functions and unlock a block, Proof of Stake protocols randomly select one token staker to validate the next block and collect staking rewards, similar to how miners collect mining rewards. PoS protocols create competition among stakers by encouraging larger token holdings in order to increase the chances of a staker being selected as the next validator. Current industry leaders in PoS protocols are Ethereum, Polkadot, Cardano, Algorand, and CasperLabs. Large scale adoption of staking protocols will substantially relieve the crypto ecosystem from the environmental concerns related to the mining process, creating a pathway for crypto to be embraced on a global scale.

With these recent advancements, the crypto ecosystem is strengthening the longevity of the global financial system in an increasingly environmentally focused landscape. Crypto’s focus on energy efficient scalability is naturally building the blueprint for a sustainable financial future.

By Liam McDonald

Crypto, Climate, & Confusion: Clearing the Air on Blockchain and the Environment

Cryptocurrency Sustainability

Cryptocurrency Sustainability

Millennials lead other generations on investing in two hot topics: Crypto assets, and climate and energy issues. Yet, some still argue that these investments are diametrically opposed due to the Bitcoin network’s considerable electrical demand. As of March 18th, 2021, the annual power consumption of the Bitcoin network was estimated to be 129 terawatt-hours (TWh), a staggering figure when compared to the entire country of Norway, which consumes 124 tWH annually. 

Counterintuitively, however, this doesn’t mean Bitcoin has a negative net impact on the environment. Like warm and cold air forming a tornado in the Great Plains, a whirlwind of colliding hype and doubt is obscuring the facts underlying today’s crypto assets. Bill Maher went so far as to say, “Almost all the people who tout Bitcoin, the millennials, the Gen Zers, the Silicon Valley types, are money-hungry opportunists and you’re not allowed to pretend you care about the environment.” Strong words for someone who, just minutes earlier, admitted “I’ve read articles about cryptocurrency, I’ve had it explained to me, and I still don’t get it, and neither do you or anyone else.” Even Elon Musk seems conflicted, having taken actions for and against Bitcoin’s case for sustainability in the last month. 

Accordingly, we must keep an open yet critical mind as we explore the interplay of finance and energy globally. Tweets and talk shows are insufficient for developing informed opinions on such a complex topic. We suggest Bill reads up on our industry-leading research before completely dismissing the fastest growing trillion dollar industry on earth.

Harvard Business Review’s May 2020 article “How Much Energy Does Bitcoin Actually Consume?” makes an important distinction: “…you cannot extrapolate the associated carbon emissions without knowing the precise energy mix — that is, the makeup of different energy sources used by the computers mining Bitcoin.” In other words, not all energy consumption incurs equal costs to the environment. Bitcoin mining is a game of margins, with the price of electricity being the chief factor. These incentives are driving miners towards “…better access to sustainable and renewable energy”, according to Argo Blockchain. In fact, data illustrating cost-efficacy improvements in wind and solar explain the 11% reduction in U.S. energy-related emissions of CO2  in 2020. As demand for decentralized finance grows, crypto mining is actually accelerating renewable resource adoption. Props to General Electric for predicting this trend in 2016.

The economic mechanism by which Bitcoin demand accelerates clean energy integration can be referred to as “energy arbitrage”. Essentially, certain places at certain times are exceptionally efficient at producing clean energy—the trouble is that these regions’ demand for electricity don’t always match production. In west Texas, Layer1’s Bitcoin mining operation perfectly illustrates the power of arbitrage. Most of the time, Layer1’s miners are busy converting cheap west Texan energy into Bitcoin. However, pursuant to their “demand response” contracts, Layer1 will shut down their machines to allow their 100 mw load to flow into the electrical grid. CEO and co-founder Alex Liegl explains, “We act as an insurance underwriter for the energy grid.” Ed Hirs, a University of Houston lecturer in energy economics adds, “It’s a lot cheaper option than building a whole new power plant or battery system just to keep it on standby.”

This form of arbitrage is replicated globally. In Iceland, “…abundant water and underground heat is harnessed by hydroelectric dams and geothermal power stations to produce cheap, green electricity that facilitates the energy-intensive process of confirming cryptocurrency transactions”, according to wired.com. In Sichuan China, Bitcoin enables overbuilt hydroelectric operations to make use of excess energy, as explained by Coindesk’s Nic Carter. “If your local energy cost is effectively zero but you cannot sell your energy anywhere, the existence of a global buyer for energy is a godsend.” The existence of Bitcoin’s global market de-risks renewable energy development as investors seek optimal conditions on the edges of civilization. 

We must also consider the impetus for Bitcoin’s rapidly growing global market: demand for a decentralized financial system. Progress towards this vision has been considerable since the onset of the COVID-19 pandemic, which spurred unprecedented manipulation of the monetary supply by centralized banks. This begs the question: how energy intensive are the financial systems that currently exist which Bitcoin and its orbiting crypto assets show promise to replace?

Let’s begin with the predominant narrative on Bitcoin today: Bitcoin replaces gold as a store of value. A 2019 study by Arca demonstrates how “gold mining in terms of crude oil usage accounts for 0.27% of worldwide oil consumption (directly comparable to Bitcoin’s electricity share)”. This approximation of equal environmental costs comes before factoring in gold transportation, storage, etc., in addition to the energy mix concept previously addressed. It also doesn’t account for decentralized finance’s ability to replace enormous shares of the traditional financial systems which expend energy across countless verticals. Bank branches, capital expenditures, employee commutes, aluminum mining, currency smelting, distribution, custody, etc. are just a few of the ways the legacy financial system expends energy to uphold a far less egalitarian and convenient monetary system. By virtue of being more perfectly scarce, more durable, and easier to transport, Bitcoin’s “distributed ledger technology” reduces the friction associated with gold’s (and other financial instruments’) existing use cases while opening new possibilities through its composability in smart contracts. The resulting reduction in friction allows financial systems to scale, accelerating financial inclusion for the “unbanked” and “underbanked”, as described in Deloitte’s Inside magazine issue 19

Equalizing access to financial services is not only a moral imperative, but an economic interest for all global-minded citizens. Many governments around the world practice ineffective and even abusive monetary policies that stifle innovation, such as in Venezuela. As the Venezuelan bolivar collapses, people are investing in food and water and resorting to bartering to preserve their purchasing power. These ancient ways of storing and exchanging value are clearly inefficient, and regression towards their use robs people of their life savings, time, and humanity. As we progress towards an increasingly globalized world, the billions left behind under such tumultuous economic conditions have little chance of realizing their potential. As a result, we all suffer.

In 1999, Forbes published an article titled, “Dig more coal — the PCs are coming”. In retrospect, these old skepticisms seem absurd. Inevitably, disruptive technologies create fear, uncertainty, and doubt—especially among those who hold stake in the aging systems. Like JP Morgan in 2017, incumbents cry foul until they realize what’s happening. “If you can’t beat them, join them” would make a great title for a memoir of these times in which financial institutions are piling into the crypto universe.

At Sarson Funds, we are not dogmatic about crypto investments. Our role is to provide evidence-based educational content on the rapidly developing realm of crypto assets while managing a broad set of portfolios for investors. We deeply respect the complexity of these emerging markets. Accordingly, we carefully choose which crypto projects we back. Though many projects will rise and fall in the coming years, a fundamental truth remains: We are dedicated to championing a future where all global citizens are united by access to fair monetary systems, financial services, and digital sovereignty. 

By Nathan Frankovitz